Caixin
Jan 21, 2019 09:01 PM
ECONOMY

Update: Rapid Slowdown in China Could Threaten ‘Systemic Financial Stability,’ IMF Says

The International Monetary Fund warned on Monday that a faster-than-expected slowdown in China could damage “systemic financial stability.” Photo: VCG
The International Monetary Fund warned on Monday that a faster-than-expected slowdown in China could damage “systemic financial stability.” Photo: VCG

(Davos, Switzerland) — The International Monetary Fund (IMF) on Monday announced that it has lowered its 2019 projection for economic growth globally, warning that a faster-than-expected slowdown in China could damage “systemic financial stability.”

The IMF forecasts that the global economy will grow by 3.5% in 2019, it said in its latest World Economic Outlook (WEO) report, down from its October forecast of 3.7%, which was itself lowered from a 3.9% forecast set earlier that year.

Drawing an analogy between the operation of the global economy and cross-country skiing, IMF Managing Director Christine Lagarde warned that the world economy is growing more slowly than expected amid increasing risks after two years of solid expansion.

“The cross-country skiing is going to be more laborious — more efforts will be required,” she said at a news conference to release the report on the sidelines of the World Economic Forum, which is taking place this week in the snow-blanketed Swiss mountain town of Davos.

The report attributed the downgrade mainly to slowing activity in Germany and Italy, weakening financial market sentiment, a deeper-than-expected contraction in Turkey, and projected decelerating growth in Mexico. The IMF expects the global economy to have grown 3.7% in 2018.

The IMF maintained its previous forecast for China’s growth in 2019 at 6.2%, having downgraded it in October from 6.4% due to weaker credit growth and rising trade barriers. China’s economy grew 6.6% in 2018, down from a revised 6.8% growth in 2017 and marking the slowest annual expansion since 1990, official data showed Monday.

Gita Gopinath, the IMF’s economic counselor and director of the research department, told reporters at the briefing that the rate last year was “consistent with the level of maturity,” and the rebalancing of the Chinese economy and that the growth slowdown has not worsened dramatically.

She said the IMF did not downgrade its projection for the country’s growth this time because it took into consideration the measures taken by the Chinese government — including tax cuts and reductions in the amount of money banks must keep in reserve — that have helped cushion the negative impact from the tariff dispute with the U.S.

However, she urged China to continue to place economic rebalancing as its medium- to long-term goal.

“We however continue to flag that it is important for China to ring-fence its financial sector to make sure that credit growth is sustainable, that there is financial regulatory reform, and there is still rebalancing of the economy away from industry towards services,” she said.

A greater-than-expected slowdown in China could damage “systemic financial stability” and cause global growth to fall short of its forecast, the IMF report said. “Concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure,” it said.

Growth in the world’s second-largest economy has lost steam over the past months amid a trade war with the U.S., despite Beijing’s efforts to cut taxes and fees, and to increase investment to bolster the economy. While fiscal stimulus will offset some of the impact of tariffs, China’s economy will continue to slow due to financial regulatory tightening and trade tensions, the IMF said.

The “main shared policy priority” is for countries to resolve their trade disagreements, said the report. In December, the U.S. agreed to delay tariff hikes on imports from China from Jan. 1 to March 1. China has since reduced its tariffs on U.S. car imports. But while the IMF report noted these developments, it did not change its forecast’s baseline assumptions that higher rates will still kick in when the 90-day truce ends.

The World Bank on Jan. 8 cut its forecast for global growth in 2019 to 2.9% from 3%, well below the IMF’s projected figures. The World Bank also lowered its forecast for China’s growth in the same period from 6.3% to 6.2%, matching the IMF’s.

Contact reporters Ke Baili (bailike@caixin.com) and Fran Wang (fangwang@caixin.com)

You've accessed an article available only to subscribers
VIEW OPTIONS
Share this article
Open WeChat and scan the QR code
GALLERY